The Commodity Futures Trading Commission today issued a "concept
release" seeking public comments to assist it in reexamining its
approach to the over-the-counter (OTC) derivatives market. The release
was issued as part of a comprehensive regulatory reform effort
designed to update the agency's oversight of both exchange and
off-exchange markets. The Commission hopes that the comments received
will help it in assessing whether its current regulatory approach to
OTC derivatives is appropriate or should be modified.

In describing the Commission's action, CFTC Chairperson, Brooksley
Born stated, "The substantial changes in the OTC derivatives
market over the past few years require the Commission to review its
regulations. The Commission is not entering into this process with
preconceived results in mind. We are reaching out to learn the views
of the public, the industry and our fellow regulators on the
appropriate regulatory approach to today's OTC derivatives
marketplace."

OTC derivatives are contracts executed outside of the regulated
exchange environment whose value depends on (or derives from) the
value of an underlying asset, reference rate or index. Market
participants use these instruments to perform a wide variety of
important risk management functions. Recent industry estimates peg the
notional value of outstanding OTC derivatives contracts at over $28
trillion worldwide.

The CFTC's last major regulatory actions involving OTC
derivatives, adopted in January 1993, were regulatory exemptions from
most provisions of the Commodity Exchange Act for certain swaps and
hybrid instruments. Since that time, the OTC derivatives market has
experienced significant changes ­ dramatic growth in both volume
and variety of products offered, participation of many new end-users
of varying degrees of sophistication, standardization of some
products, and proposals for central execution or clearing operations.
While OTC derivatives serve important economic functions, these
products, like any complex financial instrument, can present
significant risks if misused or misunderstood. A number of large,
well-publicized financial losses over the last few years have focused
the attention of the financial services industry, its regulators,
derivatives end-users and the general public on potential problems and
abuses in the OTC derivatives market. Many of these losses have come
to light since the CFTC's last major OTC derivatives regulatory
actions in 1993.

In view of these developments, the Commission believes it is
appropriate to review its regulatory approach to OTC derivatives. The
goal of this reexamination is to assist it in determining how best to
maintain adequate regulatory safeguards without impairing the ability
of the OTC derivatives market to grow and the ability of U.S. entities
to remain competitive in the global financial marketplace. In that
context, the Commission is open both to evidence in support of
broadening its existing exemptions and to evidence of the need for
additional safeguards. Thus, the concept release identifies a broad
range of issues in order to stimulate public discussion and elicit
informed analysis. The Commission seeks to draw on the knowledge and
expertise of a broad spectrum of interested parties, including OTC
derivatives dealers, end-users of derivatives, other industry
participants, other regulatory authorities, and academicians.

The Commission emphasized that it is mindful of the industry's
need to retain flexibility permitting growth and innovation, as well
as the need for legal certainty. The release does not in any way alter
the current status of any instrument or transaction under the
Commodity Exchange Act. All currently applicable exemptions,
interpretations and policy statements issued by the Commission remain
in effect, and market participants may continue to rely on them. Any
proposed regulatory modifications resulting from the concept release
would be subject to rulemaking procedures, including public comment,
and any changes that imposed new regulatory obligations or
restrictions would be applied prospectively only.

The concept release seeks comment on a number of areas where potential
changes to current CFTC exemptions might be possible, including
eligible transactions, eligible participants, clearing, transaction
execution facilities, registration, capital, internal controls, sales
practices, recordkeeping and reporting. The release also asks for the
views of commenters as to whether issues described in the release
might be addressed through industry bodies or self-regulatory
organizations.

The release concludes with the following summary of the
Commission's request for comment:

Commenters are invited to discuss the broad range of concepts and
approaches described in this release. The Commission specifically
requests commenters to compare the advantages and disadvantages of
possible changes discussed above with those of the existing regulatory
framework. In addition to responding to the specific questions
presented, the Commission encourages commenters to submit any other
relevant information or views.